The Commission today took a major step in reforming the high-cost universal service support
mechanism for non-rural carriers. The Commission, in consultation with the Federal-State
Joint Board on Universal Service, adopted the framework for a new, forward-looking, high-
cost support mechanism that will provide support for carriers that do not meet the
Communications Act's definition of a rural telephone company.

The Commission's efforts regarding high-cost support are intended to fulfill Congress's
directive that universal service be preserved and advanced in a manner that encourages
competition. In November 1998, the Joint Board made recommendations on the issues
referred to it by the Commission earlier that year. Today, the Commission adopted many of
the Joint Board's recommendations. In a combined Order and Further Notice of Proposed
Rulemaking, the Commission established the forward-looking methodology for calculating
federal universal service support for non-rural carriers providing service in high-cost areas of
the Nation, and sought comment on certain implementation issues regarding the new forward-
looking mechanism.

The Commission adopted the framework for a federal high-cost support mechanism, consistent
with the Joint Board's most recent recommendation, that will provide support for non-rural
carriers' intrastate, forward-looking costs that exceed both a national cost benchmark and the
individual state's resources available to support those costs. The Commission stated that the
new federal high-cost support mechanism will be used only to determine federal support
amounts, and will not impose any obligation on a state to adopt an intrastate support
mechanism or impose an intrastate surcharge. In order to prevent disruption in state rate
design, the Commission also adopted a "hold-harmless" approach under which the amount of
support provided by the new forward-looking mechanism will be no less than the amount of
explicit support provided by the existing mechanism. The Commission also sought further
comment on certain issues related to how support should be calculated and distributed.

In a separate Further Notice of Proposed Rulemaking, the Commission moved toward
completing its work on the computer cost model and the necessary input values on which the
new forward-looking, high-cost support mechanism is based. In this second stage of the cost
model proceeding, the Commission sought additional comment on the input values that will be
used in the engineering cost model to determine non-rural carriers' forward-looking costs to
provide supported services. On October 28, 1998, the Commission completed the first stage
of developing the cost model by selecting the model platform In the Further Notice adopted
today, the Commission proposed the input values for the model, such as the cost of cables,
switches, and other network components, in addition to various capital cost parameters.
Based on requests from numerous parties that the Commission allow the public an
opportunity to review and comment on the methodology for determining support, the cost
model, the inputs, and the resulting support amounts, the Commission postponed
implementation of the new, forward-looking high-cost support mechanism from July 1, 1999,
as previously planned. The Commission intends to select the final input values to be used in
the forward-looking cost model and finalize the methodology in time to implement the new
federal mechanism for non-rural carriers beginning January 1, 2000. In light of the comments
the Commission receives as a result of the Further Notices adopted today, it will make any
final refinements that are necessary this summer and adopt a final model and inputs in the fall.
While the cost model's operation and inputs are being verified, the Commission also will
resolve any remaining implementation issues for the new high-cost support mechanism.

Highlights of the Commission's Order are as follows:

Consistent with the Joint Board's recommendations in the Second Recommended
Decision, the Commission concluded that a primary purpose of federal high-cost
support is to ensure that states have the ability to achieve reasonably comparable rates
within and among states.

As recommended by the Joint Board, the Commission reconsidered and repudiated the
25%/75% federal/state jurisdictional division of responsibility for high-cost support.

Consistent with the Joint Board's recommendations, the Commission adopted a new
federal high-cost mechanism, which consists of a two-step process that considers both
the costs of providing supported services and the states' ability to support those costs
using their own resources.

As recommended by the Joint Board, under the new methodology, support will be
based on forward-looking costs, i.e., the estimated costs that an efficient carrier would
incur to provide supported services to its customers today. Unlike support based on
book costs, support based on forward-looking costs will not support inefficiencies in a
carrier's network, better reflects conditions in a competitive market, and sends the
correct signals for entry, investment, and innovation in the long run.

In the first step of the two-step process, the costs incurred by a non-rural carrier
to provide supported services are estimated using the Commission's national
computer cost model, which was adopted in October 1998. Those costs are
then compared to a national cost benchmark to determine those areas that have
costs in excess of the benchmark and that are therefore in need of support.

In the second step, the state's ability to achieve reasonably comparable rates
using its own resources is estimated by multiplying a fixed dollar amount by the
number of lines served by non-rural carriers in the state. (The Commission
sought comment on the fixed dollar amount for which states should be
responsible in the companion Further Notice of Proposed Rulemaking.) The
federal support mechanism provides support for costs that exceed both the
national benchmark and the individual state's resources to support those costs.

The Commission concluded that states are not required to impose a per-line
charge to collect intrastate universal service support, and carriers are not
necessarily entitled to recover a per-line amount from state mechanisms.
Instead, the per-line amount is an estimate of a state's ability to achieve
reasonable comparability, and it establishes a level above which federal support
will be provided. States are generally already meeting this burden through
existing mechanisms such as rate averaging.

Consistent with the Joint Board's recommendations, the Commission concluded that the
amount of support provided by the new forward-looking mechanism will be no less
than the amount of support provided under the present mechanism. This "hold-
harmless" approach is designed to prevent rate shock and disruption in state rate
designs after implementation of the new mechanism.

The Commission agreed with the Joint Board that current conditions do not necessitate
substantial increases in federal support for local rates, and the size of the federal high-
cost fund should not increase substantially.

The Commission reiterated that, under the new high-cost mechanism, federal universal
service support will continue to be portable among all eligible telecommunications
carriers. Portable support is consistent with the Joint Board's recommendations and the
principle of competitive neutrality, and will encourage competitive entry in high-cost
areas.

The Commission will initiate a separate proceeding in July 1999 to investigate whether
unserved areas, or areas of extremely low density, low penetration, and high cost,
should receive additional or special universal service support. For example, such areas
may encompass portions of Alaska, certain Native American lands, and other similar
areas.

The Commission stated that the Joint Board and the Commission will undertake a
comprehensive review of the operation of the high-cost support mechanism for non-
rural carriers on or before January 1, 2003.

The new federal high-cost support mechanism adopted by the Commission today affects
only universal service support for non-rural carriers that serve high-cost areas. The
high-cost support mechanism for rural carriers is not scheduled to be revised until
January 1, 2001, at the earliest, and only after the Commission and the Joint Board
have completed further deliberations on the matter based on recommendations from the
Joint Board's Rural Task Force.

Highlights of the Commission's Further Notice of Proposed Rulemaking

In the companion Further Notice, the Commission sought comment on implementation
issues including:

the level of the national benchmark;

the size of the area over which costs should be averaged when determining the
level of support;

the states' ability to support high-cost areas;

methods for ensuring that support is distributed and applied consistent with the
1996 Act;

the operation of the hold-harmless and portability provisions, including whether
universal service high-cost support should be distributed directly to the state
commissions rather than to carriers.

To supplement the record in the ongoing companion access charge reform proceeding,
in the Further Notice the Commission also sought comment on how interstate access
charges should be adjusted to account for implicit high-cost universal service support
that may, in the future, be identified in interstate access rates.

On October 28, 1998, the Commission completed the first stage of the proceeding to
implement a new, forward-looking, high-cost support mechanism with the selection of
a national cost model platform. The platform encompasses the aspects of the model
that are essentially fixed -- primarily assumptions about the design of the network and
network engineering.

In this Further Notice of Proposed Rulemaking, the Commission sought comment on
the input values that will be used in the national cost model to determine non-rural
carriers' forward-looking costs to provide supported services. Input values are the
costs associated with the network and network components necessary to provide the
supported services.

The Commission proposed and sought comment on the following in the Further Notice:

input values for the model, such as the cost of cables, switches, and other
network components, in addition to various capital cost parameters;

elimination of the annual reporting requirement for non-rural carriers; and

possible alternatives to the cost model.

The Commission stated its intent to adopt an order selecting the final input values to be
used in the forward-looking cost model in time to implement the new federal
mechanism for non-rural carriers beginning January 1, 2000.

Action by the Commission on May 27, 1999, by Seventh Report and Order and
Thirteenth Order on Reconsideration in CC Docket No. 96-45, Fourth Report and Order in CC
Docket No. 96-262, and Further Notice of Proposed Rulemaking (FCC 99-119);
Commissioners Powell and Tristani, with Chairman Kennard and Commissioner Ness
dissenting in part, and Commissioner Furchtgott-Roth concurring in part and dissenting in
part; Chairman Kennard, Commissioners Ness, Powell and Furchtgott-Roth issuing statements.